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Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Normalization of U.S. Monetary Policy 9/19/2015 NASHVILLE, Tenn. – Federal Reserve Bank of St. Louis President James Bullard discussed the case for monetary policy normalization at the annual meeting of the Community Bankers Association of Illinois on Saturday. Although the Federal Open Market Committee (FOMC) decided not to begin policy normalization when it met this past Wednesday and Thursday, Bullard said he argued against the decision at the FOMC meeting. He noted that a large majority of the FOMC still expects that policy normalization will commence this year. “The case for policy For media inquiries contact: Laura Girresch mediainquiries@stls.frb.org O ce: (314) 444-6166 Cell: (314) 348-3639 James Bullard St. Louis Fed President and CEO normalization is quite strong, since Committee objectives have essentially been met,” he said during his presentation titled, “A Long, Long Way to Go.” However, he noted, “Even during normalization, the Fed’s highly accommodative policy will be putting upward pressure on in ation, encouraging continued improvement in labor markets, and providing the best contribution to global growth that we can provide.” Objectives for Unemployment and In ation Bullard noted that the FOMC wants unemployment at its long-run level and in ation at the target rate of 2 percent. “The Committee is about as close to meeting these objectives as it has ever been in the past 50 years,” he said. To measure the distance of the economy from the FOMC’s goals, Bullard used a simple function that depends on the distance of in ation from the target rate of in ation and on the distance of the unemployment rate from its long-run average. This version puts equal weight on in ation and unemployment and is sometimes used to evaluate various policy options, Bullard explained. In his calculations, the target rate of in ation was set at 2 percent, the FOMC’s in ation target. The in ation measure used was the year-over-year percentage change in the core personal consumption expenditures price index. The long-run average rate of unemployment was set at 4.9 percent, the median longer-run value of the FOMC’s latest Summary of Economic Projections (SEP). Monetary Policy Settings Are Far From Normal While the objectives for unemployment and in ation have essentially been met based on those calculations, Bullard noted that monetary policy settings remain far from normal. He pointed out that the Fed’s balance sheet is currently about $4.5 trillion, James Bullard is president and chief executive o cer of the Federal Reserve Bank of St. Louis. In these roles, he participates in the Federal Open Market Committee (FOMC) and directs the activities of the Federal Reserve’s Eighth District. President's Website Speeches & Presentations Video Appearances Media Interviews Research Papers compared to about $800 billion in 2006. In addition, the policy rate has been about 0.13 percent for close to seven years, compared with the median of the long-run appropriate policy rate across FOMC participants in the latest SEP, which was 3.5 percent. “With the balance sheet exceptionally large and the policy rate exceptionally low, there is little chance monetary policy will be restrictive any time soon,” Bullard said. He noted that the FOMC currently expects the policy rate to approach the long-run normal level several years from now. “To actually implement what would traditionally be viewed as a restrictive monetary policy—one that would put downward pressure on in ation—the policy rate would have to exceed the long-run normal level,” Bullard said, adding, “That is not happening for many years.” Prudent Monetary Policy “Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met?” Bullard asked. “The Committee has not, in my view, provided a satisfactory answer to this question.” He added, “A prudent monetary policy based on traditional central banking principles would begin normalizing the Committee’s policy settings gradually, since the goals of policy have essentially been met.” Even once the FOMC begins to normalize, Bullard emphasized, this will still mean a very accommodative policy stance. “Policy will remain exceptionally accommodative through the medium term no matter how the Committee proceeds,” he said. “This means there will continue to be upward pressure on in ation and downward pressure on unemployment.” GENERAL Home About Us Bank Supervision Careers Community Development Economic Education Events Inside the Economy Museum Newsroom On the Economy Blog Open Vault Blog OUR DISTRICT Little Rock Branch Louisville Branch Memphis Branch Agricultural Finance Monitor Housing Market Conditions SELECTED PUBLICATIONS Bridges Economic Synopses Housing Market Perspectives In the Balance Page One Economics The Quarterly Debt Monitor Review Regional Economist ST. 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